The Changing World of Angel Investing

I read two interesting posts on angel investing this morning.  The first, by David Cohen over on Colorado Startups blog: Do you believe in Angel Investing?  And the second by Jeff Cornwall over on The Entrepreneurial Mind Blog:  Are Angels Changing Their Strategy?

As a recipient of angel funds earlier in my career and an investor of such funds now, I’m fascinated by the dynamics of Angel investing and the correlation between investment criteria and solid returns.  While I’d like to think of this as an academic interest, I think it’s more likely that I’m a greedy bastard and want to know how to make more money.

David Cohen posts about his discussion with Kimball Musk and Brad Feld concerning whether or not angel investing works at all – shouldn’t any company with a solid future be taking big money right away?  An interesting perspective, for sure, although one I have a difficult time with.  In the end, the three end up agreeing that there are more scenarios where angel investing doesn’t make sense than when it does, but there is a fairly clear situation where wise Angel investing seems to apply:

“Companies that don’t need to raise much money ($250k-$1m) before they can grow and accelerate, but are likely to later need an institutional round.”

This point makes a lot of sense to me and, in retrospect, is fairly highly correlated to the successful angel investments I have made and seen made by others.

Jeff Cornwall’s post questions data showing the decline in angel investing.  He makes some sound arguments why it’s difficult to determine just how many ventures are being angel-backed these days.  Among his points:

“Angels that do smaller deals are off the radar. They are hard to get data on in the first place because there is no formal reporting mechanism. Add to that their intense desire for privacy, and it is no surprise that we are seeing mostly the larger deal angels working in networks.”

This makes a lot of sense to me.  I’m seeing a lot of angel investing going on, but it’s much quieter than the deals being done by angel funds and, of course, well submerged below widely publicized VC deals.  FWIW, I discussed my views on startup funding strategies and the choices between angels and angel funds in my post, Show Me the Money.

Both David’s and Jeff’s posts are worth a read if you’re thinking about funding your startup with angel funds or you’re an angel investor.